Private Student Loans

Private Student Loans- Something to Avoid

Private student loans have grown astronomically in the recent years, and they are now over 20% of the entire student lending industry. A student borrower should always attempt to obtain other sources of funding before signing up for private student loans. There are a number of good reasons for this.

Higher Interest Rates

Private student loans have significantly

higher interest rates than do government backed loans. Rates of over 18% are not unusual, and there have been reports of interest rates for private student loans as high as 28%. Borrowing money at rates like that is a recipe for disaster. An average rate for private student loans has been estimated at 12%. This is far higher than the rates for government backed student loans which have upper limits set by statute. No such upper limits exist for private student loans.

Students attending non-accredited for-profit trade schools are not eligible for federally backed loans, and people attending these types of schools often sign up for private student loans. Examples are culinary schools, cosmetology schools, chiropractic colleges, photography schools, flights schools, and truck driving schools. These can be very expensive, and they are notorious for closing and leaving students stuck with their loan obligations and without any degree or training they can really use.

In their zest to get into the school and the field of study they have chosen, many young students simply do not have the financial acumen to fully understand the risk they are taking on and are attracted by the ease of the application process. Amazingly, many commit themselves to private student loans without even knowing the interest rate they signed up for and are later shocked to learn their loan is at 12-18% or higher.

Private Student Loans Don’t Offer the Same Rights and Protections as Government Backed Loans

In particular there are no rights to obtain a deferment or forbearance for private student loans. Other options, like loan dismissal after 10 years of public service are not available with private student loans. Repayment plans offered for federally backed loans, such as those based on income are not options for private student loans either.

Student Loans Cannot Be Dismissed In Bankruptcy

One area where private and federal student loans are similar is that neither can be dismissed in bankruptcy proceedings. So even if you declare bankruptcy you cannot escape the burden of these loans. If your private loan goes into default you have virtually no ability to negotiate with the collection agency. They can garnish your wages and take money from any tax refunds you are due, as well as take disability payments and even Social Security payments.

Students should be very wary of private student loans and in any case they should not borrow more than what their expected starting salary will be. So for example it is not at all advisable to borrow $50,000 to attend culinary school when you will most likely earn $20,000 or less if you find employment after graduation in that field.